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It’s never easy to buy a home, but today’s housing market is challenging on three fronts: high mortgage rates, low housing inventory and expensive home prices. Economists and real estate experts say the problems surrounding affordability and supply aren’t likely to change much in 2023.
“We need more active listings for homebuyers. Home prices grew over 40% in about four years, and now mortgage rates are near 8%,” said HousingWire Lead Analyst Logan Mohtashami.
Today’s high mortgage rates are due to a variety of factors, namely inflation and a sequence of aggressive interest rate hikes by the Federal Reserve. Even though the Fed didn’t raise its key rate at Wednesday’s policy meeting, mortgage rates could keep climbing, according to Jacob Channel, senior economist at LendingTree. “There’s a decent chance that we’ll end 2023 with the average rate on a 30-year fixed mortgage near or even slightly above 8%,” Channel said.
Here’s what experts have to say about mortgage rate trends and what you can do if you’re in the market for a new home.
Why won’t mortgage rates go down in November?
Plenty of prospective buyers hoped 2023 would be a year of new possibilities, with home prices leveling off and mortgage rates pulling back. But affordability collapsed as mortgage rates soared and the amount needed for a down payment ballooned to near record highs, according to Matthew Walsh, housing economist at Moody’s Analytics.
“People want to own homes (especially millennials), but so many are afraid to enter with high mortgage rates,” said Lisa Simonsen at Douglas Elliman Real Estate.
Those elevated mortgage rates are preventing home prices from falling: Homeowners who have locked in low rates have less incentive to sell their home (and take on a much higher monthly payment), which in turn creates a low supply of available homes for sale, according to Simonsen. A recent report from Redfin shows that the number of active home listings was down 16.9% year-over-year in September.
During its November meeting, the Fed voted against raising interest rates for now while making it clear its rate-hike cycle may not be over. The Fed’s “higher for longer” stance means the Fed will keep rates around where they are — but not lower them — until inflation comes down to the central bank’s 2% target.
Another pause on rate hikes likely won’t move the needle down, but it might keep rates in the same general range, according to Lawrence Yun, chief economist at the National Association of Realtors.
“As long as a rate hike is on the table, investors are likely to position cautiously, and the tendency for rates to remain steady to slightly higher remains,” said Danielle Hale, chief economist at Realtor.com. If inflationary pressures continue to subside and there is notable economic improvement, that could drive mortgage rates lower. But many experts say those changes won’t happen until 2024.
The bottom line is that the unaffordable housing market won’t be repaired overnight. Experts note that what’s needed to change the equation is a combination of lower interest rates, rising household income, stable home prices and more housing inventory. Moody’s Walsh notes that given it’s unlikely for there to be a substantial boost in income or a significant decline in mortgage rates anytime soon, the main variable is for house prices to fall.
What other forecasters say
While mortgage forecasters base their projections on different data, most predict rates will fall from their current highs by the end of 2023. But exactly when and by how much varies. Here’s a look at where some of the major housing authorities expect average mortgage rates to land at the end of the year.
What’s affecting mortgage rates right now?
During the pandemic, mortgage rates were historically low, around 3%. That all changed when inflation hit record highs and the Fed stepped in to slow the economy by hiking interest rates. Since March 2022, mortgage rates have more than doubled as the Fed carried out nearly a dozen rate increases.
Put into historical context, an 8% rate for a 30-year fixed mortgage isn’t a historical anomaly: Average rates were above 8% back in the year 2000. But compared to ultralow rates just a few years ago, the combined impact of higher rates and higher home prices has driven up the monthly cost of financing the typical listed home more than 12.4% from a year ago, according to Realtor.com’s September 2023 estimates. That number surpasses both inflation and wage growth for the same period.
The Fed’s interest rate hikes and the high-inflation environment aren’t the sole influences behind elevated mortgage rates. Mortgage rates are also affected by other macroeconomic factors, a combination of market conditions, investor confidence and global events.
Inflation: While the Consumer Price Index shows inflation has been slowly cooling overall to 3.7% since its peak at 9.1% last June, housing costs are the main contributor to today’s inflationary environment, growing 7.2% annually in September. Generally, when inflation is high, mortgage rates tend to be high.
Monetary policy: The Federal Reserve balances economic growth by adjusting the money supply, which impacts the interest rates for borrowers. Though the Fed doesn’t set consumer mortgage rates directly, establishing the federal funds rate impacts the direction of longer-term rates, such as 30-year mortgage rates.
The bond market: When a lender issues a mortgage, that home loan is packaged with other mortgages, creating a type of bond called a mortgage-backed security. Those bonds are then sold to investors so the bank has money for new loans. Mortgage lenders often use long-term bond yields, like the 10-Year Treasury, as a benchmark to set the interest rates on home loans. When yields rise, mortgage rates typically increase.
Expert advice for homebuyers
Higher mortgage rates mean it’s more difficult to afford a home now, but the reduced demand also means less competition.
“I think the smarter buyers will be making a value play buying now, as compared to when rates drop and everyone jumps back into the market,” said Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage.
Still, don’t rush into a major purchase like buying a home without knowing what you can afford, especially with today’s higher rates. If you haven’t updated your homebuying budget recently, you could be in for a rude awakening when you get a mortgage quote.
CNET’s mortgage calculator can help you figure out and prepare for monthly payments.
Consider the rent vs. own equation
The housing market shouldn’t determine if you’re getting a home — your personal situation and financial circumstances should.
Whether it makes more sense to rent or buy a home isn’t just about comparing monthly rent to a mortgage payment. Buying a home requires thousands of dollars in upfront fees and a down payment, in addition to ongoing maintenance and upkeep costs. How long you plan to live in the area should also factor into your decision. If you sell the house in two or three years, you may not have enough equity built up to offset the fees.
Over the long term, though, buying a home can be a good way to increase your net worth, unlike renting. When you buy, you can also lock in a fixed interest rate, so your monthly payments won’t fluctuate compared to the rental market.
As the age-old saying goes, “Marry the home, date the rate,” meaning the rate you lock in when you take out a mortgage doesn’t have to be permanent. If rates decline in the future, you can refinance your mortgage to get a new, lower rate.
Shop around for lenders
Not all mortgage lenders are created equal. When you start looking for potential lenders, it’s a good idea to compare multiple offers at once.
Based on factors such as your credit score, debt-to-income ratio and down payment, a lender can estimate your interest rate, monthly mortgage payment and closing costs. Experts recommend getting at least three loan estimates from different lenders so you can get a true apples-to-apples comparison.
A good lender should be in tune with what’s available in your market and help you navigate your options, in addition to explaining things like how private mortgage insurance factors in.
Most importantly, it’s critical to work with a reputable and preferably local lender, said Alix Nadi from Re/Max Around Atlanta Realty. “They are the only ones who can give definitive answers regarding what the buyer qualifies for, what those payments look like and what costs are associated with the purchase,” Nadi said.
See the full article on mortgage interest rates, or, read more Arizona real estate investing news.
